IFRS 18: The Best 2027 Implementation Guide

Foundation & Introduction

IFRS 18 represents the most significant upgrade to financial reporting standards in two decades, focused entirely on improving the comparability and transparency of financial performance. The IFRS 18 Presentation and Disclosure standard applies universally to all entities preparing financial statements under the International Financial Reporting Standards.

At its core, preparing IFRS 18 financial statements requires adhering to a newly established two-role framework that clearly separates the purpose of the primary financial statements versus the notes:

Primary Financial Statements: Must provide useful, structured summaries of an entity’s assets, liabilities, equity, income, expenses, and cash flows to provide an understandable overview and enable comparability.
The Notes: Must provide material, disaggregated information necessary to fully understand the line items presented in the primary statements and to supplement them with additional details.

IFRS 18 changes the presentation of financial performance but builds on existing principles. Concepts such as going concern, accruals, offsetting, and reporting frequency, which were in IAS 1, are moving to IAS 8.

This transition is part of the IASB’s effort to streamline the IFRS framework: IFRS 18 will now focus strictly on the presentation and structure of the financial statements, while the newly expanded IAS 8 (retitled as Basis of Preparation of Financial Statements) serves as the manual for the underlying principles of how those statements are prepared.

For preparers of financial statements, this means that while the core rules haven’t changed, they will now look to a different standard as the base for these essential reporting requirements.

Important concepts such as the going concern assumption, accrual accounting, offsetting, and reporting frequency are directly included in IAS 8 with minimal changes.

The Redesigned Statement of Profit or Loss

The most significant update to IFRS 18 is that income statements will now shift away from flexible formats toward strict structural guidelines.

IFRS 18 establishes five mandatory classification categories for all income and expenses. They are:

Operating
Investing
Financing
Income Taxes
Discontinued Operations

Once you’ve understood the basic structure of the income statement under IFRS 18, you’ll need to know that the new standard introduces three essential subtotals that serve as reliable benchmarks for everyone.

Operating profit or loss
Profit or loss before financing and income taxes
Profit or loss

Treatment of Foreign Exchange and Derivatives:

Foreign Exchange (FX): FX differences must be classified in the exact same category as the underlying income or expense that generated them. However, if tracking this involves undue cost or effort, the standard permits classifying the FX differences directly into the operating category.
Derivatives: Gains and losses on derivatives in a qualifying hedge are aligned with the hedged risk category. For derivatives used for risk management that are not designated, they follow the hedged risk unless grossing up is needed, in which case they are accounted for as operating.

IFRS 18 Presentation of SOPL — Format of Profit and Loss Statement under the new IFRS 18

Classification of Operating Expenses

Under IFRS 18, the classification of operating expenses shifts significantly from the previous IAS 1 requirements. Entities are now strictly required to present an analysis of their operating expenses directly on the face of the income statement, thereby eliminating the past option in IAS 1 to disclose this analysis only in the notes.

To fulfil this requirement, an entity must classify its operating expenses using one of three methods: by nature, by function, or on a mixed basis.

Three Classification Methods of Operating Expenses

By Nature: Expenses are grouped by the type of economic resource consumed to carry out the entity’s activities, without reference to the specific business activity or department for which they were used. Common examples include raw materials, transport costs, employee benefits, and depreciation.
By Function: Expenses are allocated and aggregated according to the specific business activity or role to which the consumed resource relates. Typical examples include the cost of goods sold, research and development (R&D) expenses, sales and marketing expenses, and administrative expenses. Interestingly, IFRS 18 does not formally define ‘function’; instead, entities must establish their own definitions based on their activities and apply them consistently.
Mixed Basis: IFRS 18 explicitly permits entities to present some expenses by function and others by nature simultaneously on the face of the income statement. If a mixed basis is used, the line item descriptions must clearly identify what is included or excluded, for example, by labelling a line item ’employee benefits other than those included in cost of sales’ to avoid confusing users.

Selecting the Most Useful Structured Summary

Management does not have a free choice when selecting a method. The standard mandates selecting the presentation method that provides the most useful structured summary of the entity’s operating expenses. The assessment requires considering four key factors:

Main components or drivers of profitability: What information is most relevant to the entity’s margins? For a retail entity, ‘cost of sales (a function) might be the main driver, whereas for a service provider, ’employee costs’ (a nature) might be significantly more relevant.
Internal management reporting: The classification should closely align with how the business is managed and how management reviews performance internally.
Industry practice: Aligning with peers who use similar methods improves comparability for users of financial statements.
Arbitrariness of allocation: If allocating specific expenses to functional line items requires highly arbitrary splits, those expenses should instead be classified by nature.

Strict Mandates When Using ‘By Function’ or ‘Mixed’ Approaches

If management determines that presenting any operating expenses by function provides the most useful structured summary, two mandatory rules are triggered:

A. Mandatory Cost of Sales Line Item: If an entity classifies operating expenses by function, and it has a cost of sales function, it must explicitly present a separate ‘cost of sales’ line item on the face of the statement of profit or loss. This line must include the total inventory expense required to be disclosed by IAS 2.

B. The ‘Rule of 5’ Nature Disclosures: To ensure transparency is not lost through functional aggregation, the entity must provide a single note disclosing quantitative totals for five specific nature expenses: depreciation, amortisation, employee benefits, impairment losses/reversals, and inventory write-downs/reversals. Crucially, this note must break down and map exactly how much of each total relates to the specific line items presented in the operating category.

The Five Mandatory Nature Disclosures
1. Depreciation (property, plant & equipment, investment property, and right-of-use assets)
2. Amortisation of intangible assets
3. Employee benefits (including share-based payments)
4. Impairment losses and reversals
5. Inventory write-downs and reversals

Notably, the total amounts disclosed for these five categories do not necessarily represent the amounts expensed in the current period. The totals can also include amounts that have been capitalised into the carrying amount of an asset (such as inventory or internally generated software), provided the entity includes a qualitative explanation identifying the assets involved.

Finally, it is critical to note that the method an entity chooses to present its operating expenses is an accounting policy. Changing the method (e.g., moving from a by-function approach to a by-nature approach) constitutes a change in accounting policy under IAS 8, meaning it requires retrospective restatement of comparative periods unless an IFRS Standard specifically permits otherwise.

Classification Requirements for Specific Entities

For entities in the financial sector, IFRS 18 emphasises a key point: the ‘Specified Main Business Activities’ concept. If an entity primarily invests in assets or offers financing to customers, it must reclassify certain items into the operating category, which would typically be classified as investing or financing activities. Practical examples of IFRS 18 show how this applies to specialised firms.

Banks and Lending Institutions: Entities that provide financing to customers must classify interest income from loans, as well as the interest expenses related to funding those loans, directly in the operating category rather than in investing or financing.
Insurers: Because insurers invest heavily in assets as a core business function, income and expenses from investment properties, as well as net gains on associates and joint ventures measured at fair value, must be reclassified from the investing category to the operating category.
Investment Firms: Investment entities that don’t consolidate certain subsidiaries but measure them at fair value through profit or loss must record those fair value gains or losses in operating profit, not investing. Note: Equity-accounted investments are always in the investing category, regardless of the entity’s main business.

Dual Activity and Multi-Segment Entities

Under IFRS 18, evaluating dual-activity and multi-segment entities depends on accurately identifying all of an entity’s ‘main business activities’ to drive the correct classification of income and expenses.

Since an entity can operate across multiple sectors, management often relies on internal performance measures or IFRS 8 reportable segments to evidence its main activities. For groups, this assessment must be performed from the consolidated perspective, meaning a subsidiary’s standalone main activities might not align with the group’s overall activities, thereby triggering consolidation reclassification adjustments. Operationally, these entities must apply general classification rules to their standard business lines while layering on strict, specific requirements for any “specified” main activities (such as investing in assets or financing customers).

If a dual-activity entity operates as both a customer financier and a financial asset investor (such as a combined retail and investment bank), it is stripped of the standard accounting policy choice for cash and cash equivalents and must strictly classify all related income and expenses within the operating category.

Aggregation and Disaggregation

Beyond the income statement, key IFRS 18 changes focus on the new aggregation and disaggregation principles. This ensures financial statements are not obscured by excessive grouping.

Under IFRS 18, information must be aggregated based on shared characteristics and disaggregated based on non-shared characteristics. When deciding how to group items, management must consider specific traits such as the item’s nature, function, measurement basis, size, geographical location, or regulatory environment. A single dissimilar characteristic could necessitate disaggregation in the notes.

IFRS 18 strongly discourages the use of opaque labels such as ‘Other operating expenses’ or ‘Other finance costs’. If an entity cannot find a more precise or informative description, it must evaluate the exact contents of that ‘Other’ bucket. If the ‘Other’ bucket comprises only immaterial items, but the total amount is large enough that users might reasonably question its contents, the IFRS 18 disclosure requirements trigger a strict mandate. The entity must explicitly state in the notes that no material items are included and disclose the nature and amount of the largest single immaterial item in that bucket to eliminate any ambiguity.

IAS 7 Statement of Cash Flows Update

To harmonise the primary statements, IFRS 18 amends IAS 7. Entities utilising the indirect method for the statement of cash flows must now universally use IFRS 18’s operating profit as the uniform starting point for preparing cash flows, rather than having the flexibility to start with net profit or profit before tax.

Additionally, the standard eliminates previous accounting policy choices for the classification of interest and dividend cash flows.

Entities Without Specified Main Business Activities: Interest and dividends received must now be strictly classified as investing cash flows, while interest and dividends paid must be classified as financing cash flows.
Entities With Specified Main Business Activities (e.g., Banks): These entities must classify interest paid, interest received, and dividends received into a single category (typically operating) that directly mirrors how the related income and expenses are classified in the newly redesigned income statement. Dividends paid continue to be classified as financing cash flows.

Management-Defined Performance Measures (MPMs)

One of the most significant changes in IFRS 18 is how it addresses what we historically called ‘Non-GAAP’ or Alternative Performance Measures (APMs).

If you are wondering what is IFRS 18 aiming to solve here, it’s the lack of transparency, consistency, and comparability in how companies report customised profit metrics to investors.

IFRS 18 has defined Management Performance Measures (MPM) and brought them directly into the audited notes of the financial statements.

Let’s break down the exact scope, the rigorous new reconciliation requirements, and the strict consistency rules you need to master for a smooth IFRS 18 transition.

Definition and Scope of MPMs

You first need to establish exactly what qualifies as an MPM. The definition is highly specific. An MPM is strictly defined as a subtotal of income and expenses that meets three criteria:

External Communication: It is used in public communications outside the IFRS 18 financial statements (e.g., management commentary, earnings releases, or investor presentations).
Management’s View: It communicates management’s view of an aspect of the entity’s overall financial performance.
Not IFRS-Defined: It is not a subtotal explicitly required by IFRS Accounting Standards, nor is it a common subtotal explicitly listed in the standard (such as gross profit, or IFRS 18 operating profit before depreciation, amortisation, and impairments).

The scope of MPMs is significantly narrower than general APMs. Here are some IFRS 18 examples of measures that strictly do not qualify as MPMs:

Financial ratios (like return on equity, combined ratios, or cost-to-income ratios).
Cash flow or liquidity measures (like free cash flow).
Single-element subtotals comprising only income or only expenses (like ‘adjusted revenue’).
Non-financial performance measures (like customer satisfaction scores or carbon emissions).

Now, for understanding, let’s look at some examples that could be MPM as per IFRS 18:

Adjusted Operating Profit: Operating profit modified to exclude a major restructuring cost.
Adjusted EBITDA: Earnings before interest, tax, depreciation, and amortisation, further adjusted for non-recurring legal settlements.
Adjusted Profit or Loss: Net income excluding unique items, such as an impairment of a non-current asset.

A key rule within the IFRS 18 presentation and disclosure framework is the ‘rebuttable presumption’. If management uses a subtotal of income and expenses in public communications, it is automatically presumed to be an MPM. You can only rebut this presumption if you have reasonable, supportable evidence demonstrating that the metric does not communicate management’s view of overall performance, or that it is published solely to satisfy a specific external regulatory requirement.

Notes and Disclosure Requirements for MPMs

The disclosure requirements mandate that all information about your MPMs be centralised in a single note to the financial statements to prevent it from being scattered or obscured. Within this single note, management must provide:

A clear statement that MPMs reflect management’s view and are not necessarily comparable to measures with similar labels used by peers
A description of why the MPM provides useful information and precisely how it is calculated.

Crucially, you must provide a transparent, mathematical reconciliation between the MPM and the most directly comparable subtotal required by IFRS Accounting Standards.

For every single reconciling item (e.g., adding back ‘restructuring costs’ or ‘non-recurring legal fees’), you must explicitly calculate and disclose:

The specific line item in the primary income statement to which the amount relates.
The income tax effect for that specific adjustment.
The effect on non-controlling interests (NCI) for that specific adjustment.

Calculating this tax effect requires technical precision. You must determine the tax impact of each individual reconciling item by using the statutory tax rate applicable to the transaction in its specific jurisdiction, a reasonable pro-rata allocation of current and deferred taxes, or another method that achieves an appropriate allocation. You must also provide a description of the method you used to calculate this tax effect.

Consistency and Changes in MPMs

As you develop your strategic IFRS 18 roadmap, be aware that the IASB introduced strict rules to prevent entities from opportunistically changing which MPMs they highlight from year to year. While choosing an MPM is not formally considered an accounting policy choice, altering one triggers mandatory disclosures.

If an entity does any of the following:

Changes how it calculates an existing MPM,
Introduces a completely new MPM, or
Stops using a previously disclosed MPM

If any of the above three things are done by the company, then it must provide a detailed explanation of the reasons for the change, addition, or cessation. Most importantly, the entity must provide restated comparative information for prior periods to reflect this change, unless management can prove it is genuinely impracticable to do so.

Effective Date and Transition

The mandatory IFRS 18 effective date is set for annual reporting periods beginning on or after January 1, 2027, with early adoption permitted.

Managing the IFRS 18 transition effectively requires applying the standard in full retrospectively. This means prior-period comparatives (e.g., FY 2026 data for a 2027 adoption) must be fully restated to align with the new five-category P&L and structural mandates. During the transition year, a reconciliation mapping the exact line-item shifts from the old IAS 1 layout to the new IFRS 18 layout must be disclosed.

Creating a robust IFRS 18 roadmap is vital, as system data tagging will need to be completely remapped. Firms should utilise an IFRS 18 implementation guide to navigate the complex system transformations required to support new data and systems. If you would like help with it, please contact me through this link.

If you would like to learn more about:

Applicability of NFRS: Click Here
NAS for NPOs: Click Here
Leases (IFRS 16): Click Here